Sportsgeekonomics

Utterly Awesome Graphic

andyhre — Fri, 10 May 2013 08:31:30 -0700

http://deadspin.com/infographic-is-your-states-highest-paid-employee-a-co-489635228

World's Simplest Revenue Analysis

andyhre — Fri, 03 May 2013 10:21:00 -0700

Six Major College Conferences revenue in 2011-12, per EADA: $5,184,916,365

Those same conferences in 2010-11, also per EADA: $4,882,657,118

One-year Change: $302 million.

Cool meta-analysis of the change in how sports journalists cover the NCAA and what is now a scandal

andyhre — Fri, 12 Apr 2013 10:09:00 -0700

http://sportsmediaguy.wordpress.com/2013/04/12/the-ncaa-a-change-gonna-come/

David Drummond's remarks from 2012

andyhre — Thu, 11 Apr 2013 14:13:22 -0700

A must read: http://law.scu.edu/sportslaw/file/Drummond-speech.pdf

I hadn’t realized it, but David Drummond’s remarks from Santa Clara Sports Law Symposium are online. Link is above. Go read!

Must Watch TV, Chris Hayes's discussion

andyhre — Tue, 02 Apr 2013 13:01:00 -0700

http://video.msnbc.msn.com/all-in-/51399243#51399243

Dave Berri at Freakonomics asks: "How About a Free Market for College Athletes?"

andyhre — Fri, 22 Mar 2013 07:37:34 -0700

I’d recommend reading Dave Berri’s “How About a Free Market for College Athletes?”

Making Riches look like Rags

andyhre — Tue, 19 Mar 2013 09:26:00 -0700

(note: for some reason i though I’d posted this a while back, but I couldn’t seem to find it on the website. So forgive the duplication, but here it is again)

Making Riches look like Rags: How NCAA-style accounting can transform a small profit into a two million-dollar loss.

In 2011, the University of Nebraska-Omaha (UNO) made the strategic decision to move from Division II sports to Division I, and in the process to abandon football and wrestling as intercollegiate sports. The argument was that these programs were costing UNO too much, and that with the envisioned increases in expenditures, it was felt that cutting these two programs would free up money to support the other sports. “UNO athletic director Trev Alberts said the university couldn’t afford to keep football and wrestling in its move up from Division II to join the Division I Summit League, which doesn’t sponsor the two sports.”[1]

This note focuses on the question of whether the football and wrestling programs were actual net drains of cash for the University as a whole, and looks specifically at two of the largest components of the cost of a program – direct institutional support and the cost of athletic scholarships, also known as Grants-in-Aid or GIAs. Importantly, this is an incremental analysis – it assumes the rest of the accounting is correct, and asks whether the marginal impact of institutional support and grants-in-aid, when properly accounted for, change the bottom line. The conclusion is that the nature of UNO’s accounting (using a system designed by the NCAA) greatly understates the revenues of the UNO program as related to students receiving parital GIAs, and as a result overstates the net drain on cash of the football and wrestling programs. Rather than losing approximately $1 million from scholarships and direct institutional support, the two programs actually turned a modest profit from the tuition and other fees paid by football players and wrestlers, but because of UNO’s accounting, the school did not recognize the substantial revenue benefits stemming from these partial scholarship recipients and walk-ons. This led to a substantial miscalculation of the cost of these programs, and likely a poor decision to cancel the two sports in hopes of reaping cost savings.

The Pernicious Accounting Impact of Related-Party Transactions

The first and most obvious problem with UNO’s athletic department’s reported accounting numbers is that there is no recognition of the fact that a good deal of the expenses on the UNO athletic departments books are payments made to, or receipts from, the University itself. This creates the obvious accounting issue that it does not matter what price is chosen for a given good or service if the buyer and the seller are two parts of the same entity. For example, if UNO decided to charge its athletic departments a $1 million per athlete “accounting fee” on top of any other costs, then a team with 10 athletes would appear to cost the university an additional $10 million. But of course, this $10 million expense would be matched with an equal amount of revenue to the school from this “accounting fee,” and the net cost to the school would be zero.

Even if the ‘accounting fee” stemmed from an actual underlying cost associated with providing accounting services to the athletic department, the $10 million figure would tell us nothing about the true cost. If the accounting services provided to the athletic department really cost the school $50,000 in incremental expenditures, the fact that the school charges the athletic department $10 million say zero about the true financial impact on the university. It is this phenomenon which makes it so difficult to determine the true costs to a school for the self-supplied goods and services for which the athletic department recognizes expenses; the result is that the athletic department’s accounting figures are rendered somewhat useless for making smart business decisions, in particular whether cutting a sport is profitable or not.

Related-Party Transactions: Direct Support vs. Grants in Aid.

A perfect real-life example of the issue illustrated above with the fictional “accounting fee” is the fact that UNO hands the athletic department a chunk of cash that it calls “direct support” and then takes most of the money right back by charging the school full retail price for the athletic scholarships the department gives to athletes.

To put some real numbers on in, in the 2009-2010 season, UNO claims to have provided $863,474 in University support to football, but then it charged the athletic department $684,539 for the GIAs which were granted to the schools 74 scholarship football players. Those 74 football players shared 36 full scholarships, meaning that on average each got just slightly less than a half-scholarship. For wrestling, the school provided $208,476 in direct support, and then took back $163,862 for grants-in-aid. UNO’s books thus show $848,401 in expenses related to financial aid.[2]

Here the NCAA is keen to step in and point out that direct institutional support provided by a school to the athletic department isn’t real revenue – they use the term “allocated” revenues to distinguish them from “generated” revenues that come from outside parties such as television networks or ticket purchasers.[3] Thus, under this methodology (espoused by Transylvania University Accounting Professor Dan Fulks), a school should deduct from the books the entirety of the direct institutional support provided to these two programs, or $1,071,950.[4] That would argue that holding all other revenues and expenses constant, the NCAA view of the UNO football and wrestling programs is that they lost $850,000 in scholarship expenses and that we should deduct a further $1 million to back out revenue that wasn’t actually “generated.”[5]

In truth, economically, neither the $850,000 nor the $1 million figure has any real bearing on the cost of providing athletic scholarships. The Fulks method, which treats the scholarship costs as correct and then further deducts direct institutional support, without recognizing that much of the support is simply a related-party transaction, create the illusion of a nearly $2 million gap, when nothing of the sort exists. Clearly, the net amount, the $178,935 difference for football[6] or the $44,614 for wrestling[7] (a total of $223,549), can represent an actual cost to the school.[8]

As for the rest, as with the “accounting fee” example above, what matters is not the price the school charges itself for those scholarships, but the actual out-of-pocket cost the school incurs by providing those services. If there were zero cost to providing the room, board, tuition, fees, and required books associated with a scholarship, then regardless of how much or how little UNO charged the athletic department (and then “funded” via institutional support), the true cost of those services would be zero. Calling it a billion dollar expense doesn’t make it one. On the other hand, to the extent those services do have a cost (and certainly some do: food, for example, is not free), then on top of the net support $223,549 we would need to add those out-of-pocket expenditures to determine the impact to the university of providing those scholarships.

However, in addition to determining the true costs, it is also critical to determine whether there are any revenues left off of the athletic department’s books that stem from the granting of a GIA. At some level, this would seem impossible – how could giving a scholarship result in revenues, above and beyond the sports-related revenues already recognized on the athletic departments P&L?[9] But the critical thing to remember is that the UNO, like most schools, grants most of their scholarships (across all sports) in the form of partial GIAs. UNO differs from major programs in that it uses partial scholarships for football as well as the Olympic sports, such as wrestling, where the practice is fairly universal.

As any product manager will tell you, if giving a discount can increase total purchases, what looks like an expense (e.g., a 10%-off coupon) is really revenue (the 90% of the price that the consumer paid, but would have spent elsewhere without the coupon). But nothing in the NCAA accounting on which the UNO relies credits the athletic department for any of that revenue. Thus it is critical to properly calculate not just out-of-pocket costs, but also any inflows of cash directly related to the granting of GIAs to football players and wrestlers.

The Components of a Grant-in-Aid

When a school gives a single student a 100% GIA they provide a full grant of tuition and fees, room, board, and required books and supplies. UNO spreads out its GIA grants across multiple athletes, so that few, if any, receive a full scholarship. UNO accounting does not break down whether a student on a half scholarship got 50% of each component or instead got 100% tuition remission and no housing allowance. UNO may very well skew their awards to the elements of the scholarship that have the least cost impact on the university; nevertheless, the analysis that follows assumes that a half scholarship covers half of every category, rather than, say, giving 100% of tuition and charging full price for room and board. Based on this assumption, the analysis that follows breaks down the GIA grant into its four major components (tuition and fees, room, board, and required books and supplies) and shows the true economic impact of each on the school’s bottom line.

Tuition

Football: UNO’s NCAA accounting submission indicates that in 2009-10, UNO provided 74 football players with some form of a GIA, and that the aid was equal to 36 full-time GIAs. Thus, on average the school is effectively giving each player a half scholarship.[10] In-state Tuition at UNO was listed at $6,280.[11] That means that, on average, when UNO provides a football player with a scholarship, the flow of money is in to the University, not out, and each accepted scholarship generates $3,225 in revenue. Totaled across the 74 players, this sums to $238,640.

Wrestling: Using the same logic as above, there are 9 full scholarships granted to wrestlers, over 27 athletes, which means on average those 27 athletes are paying 2/3 of a full-level of tuition. With in-state Tuition at UNO is listed at $6,280, the wrestling team’s scholarship players generated $4,187 in revenue for each of the 27 players. That totals $113,040.[12]

Obviously, revenue is not the same as profit, but absolutely none of this revenue is credited to the team on UNO’s books. Whenever expenses are recognized but the associated revenue is not, this will tend to understate profits. Calculating those costs is tricky, especially without access to the school’s more detailed accounting, but except under very specific circumstances, failing to recognize any revenue is almost certainly wrong.

Answering the cost question requires a key assumptions to address the following question: What would the school do with the athlete’s admission slot if it did not give that slot to the athlete – would it replace him with a full-paying student? An average-paying student? No student at all? If the answer is that by admitting an athlete on 50% or 33% scholarship, UNO chooses not to admit a student who would pay 100% of tuition, then (likely by accident) accounting for zero revenue and all of the cost of a scholarship is an excellent estimate of the impact to the school.[13] But according to ESPN, this is not the case at UNO – the school is unable to get as many students to attend as it wants, and would admit many more if they were willing to attend.[14] As a result, if the football player or wrestler were denied a scholarship and thus went elsewhere to play his sport and study,[15] there is no replacement student available. The forgone revenue from admitting a scholarship athlete is zero, whereas the forgone revenue from choosing not to offer a scholarship is half or two-thirds of the cost of tuition.

The costs then are not opportunity costs, i.e., lost opportunities for revenues, but instead are the actual costs of providing 74 football players and 27 wrestlers with a year of college instruction. It is tempting to say that on the margin, this cost is zero. If you take a campus of 11,000 students and plop 101 athletes, freshman through seniors, into the mix, do the school’s costs change perceptibly? As tempting as that is, nevertheless one hundred students probably do have incremental costs associated with their attendance. As an estimate for the costs, one can think of the cost of a full-time college instructor, which at UNO appears to be less than $40,000 per year.[16] If every 40 students generate the need for a one full-time instructor, then 100 athletes cost no more than $100,000 to educate (and thus it costs about $1,000 to provide each athlete with the actual tuition associated with tuition).

So with this assumption in hand, it’s clear that the school is actually making money on the tuition portion of its football and wrestling scholarships, because when it admits a football player on a half scholarship, it costs them something like $1,000 to provide that student with instruction, and even with a 50% discount, the student is paying $3,225 in revenue, for a tuition-only profit of $2,225. For wrestlers with a one-third scholarship, the net profit on tuition is higher, $3,187 per athlete per year. And for each out-of-state athlete paying out-of-state tuition, the profit would be $4,800 to $6,400 higher still.[17]

UNO’s mix of football players in 2010 was about two-thirds in-state, one-third out of state.[18] And thus, for football, the total profit on tuition is well approximated by tallying 50 in-state students x 2,225 in profit, plus 24 out-of-state students x $7,030, for a total football tuition profit of $279,970.

Wrestling seems to have slightly more out-of-state students,[19] but given the approximate nature of this analysis, the two-thirds in-state, one-third out of state assumption makes sense for wrestling as well. Therefore, the total profit on tuition is 18 in-state students x $3,187 in profit, plus 9 out-of-state students x 9,954, for a total wrestling profit from tuition of $143,712.

Room:

Generally speaking, housing is often a scarce resource on college campuses. Unless dorms are sitting vacant, then every time someone receives discounted access to a room, this displaces another resident, one who might have paid full price. So unlike tuition, where for UNO there is likely zero forgone revenue and a fairly low marginal expenditure associated with a scholarship, it is quite likely that every dorm room provided at a discount to an athlete directly reduces the schools revenue from housing, dollar for dollar. And similarly, for athletes who live off campus and receive a rent stipend, this expenditure is a true cost. This analysis therefore assumes that on-campus housing is a scarce commodity, which is the most conservative assumption possible.[20]

In 2010, the school listed the cost of room and board at $8,140, without providing a breakdown between the two costs. Assuming that 75% of this cost is driven by room means means the room component runs at around $6,100 per student. So if housing is an actual scarce resource, by giving away 74 spaces at 50% rather than full price costs the school $220,000 a year.[21] For 27 wrestlers, who are on one-third scholarships, this costs the school $55,000 per year. These values are the upper bound on what it really costs, since any otherwise vacant room carries zero marginal cost to provide.

Board

In contrast to providing housing, which is a scarce resource on most campuses, for a school to provide one student with food does not generally require that the school forgo feeding another student. Instead the analysis can focus directly on the costs of the food versus the revenue taken in.

When an athlete consumes food provided by the school, there is a real cost associated with that consumption. But just as certainly, the University pays less for food than it charges for a meal plan. So the correct cost for board is not what the school charges at retail to full-paying students, but rather what it costs the school, on the margin, to provide those 74 football players and 27 wrestlers with food, less the money that they get from those 74 students on from the 50% that they pay in, or the football team and the 27 students who wrestler and pay two-thirds of the food price.

It is not uncommon for the markup on food to be at least 100%, meaning the school may charge twice as much at retail as it actually costs to provide the food to athletes. If it then gives football players a 50% discount, this almost perfectly covers the school’s costs. For wrestlers who pay two-thirds of the cost, this means the school takes in more than their costs, they make a small profit of $340 per athlete.[22] Thus the 27 wrestlers generate a profit for board of $9,158.

Here it is important to recognize that the economics are very different if the school is providing an allowance for food by writing the student a check, rather than providing them with a discounted on-campus meal plan. To the extent athletes are getting checks to purchase food off campus (and not using that check to buy a university meal plan), the correct cost to the school is the amount of money on the check.

Books

Like on-campus food, books sold by the on-campus bookstore can be thought of, economically, as limitless. Books cost real money to give to athletes, but they are not scarce, so that selling a given book at a discount to a wrestler will not prevent the school from ordering another copy of that book and selling it at full-price to another student. Therefore, the analysis can focus on the difference between the revenue that selling the book at a discount generates (none of which is currently on the books of the school), versus the cost of acquiring that book from the publisher or distributor.

As with food, a 100% markup is common for bookstores.[23] So by the same logic as above, providing a 50% discount (as is the case for football) doesn’t cost the school money – they simply break even. And for the wrestlers who are paying two-thirds of the retail price, each discounted book generates a small profit.

UNO’s costs of attendance figures list books and supplies at $950 per year. So each wrestler on one-third scholarship pays $633. Assuming a 100%, those books and supplies only cost the school $475, leaving a profit of $158. For the 27 athletes, this sums to $4,275.[24]

The true costs of Grants-in-Aid

As is clear from the above analysis, the stated costs to the athletic department of providing football ($684,539) and wrestling (163,862) grants-in-aid bears almost no relationship to the actual cost to the university of providing discounts to those 101 students. Tuition, Board, and Books all generate profits to the school because of the revenue stemming from the grant of a partial scholarship. Housing, under the conservative assumption that every dorm room at UNO is occupied, has a real cost, but on net, the profits from the other components outweigh the costs of providing housing. For football, the total profit is approximately $60,000[25] – a far cry from the loss of $684,539 the school claims. For wrestling, where the discounts are smaller, there is a clear profit of approximately $100,000.[26]

Nowhere on the UNO athletic department books will you find any recognition that these sports are generating a profit by offering partial scholarships. But in an environment where a scholarship acts much more like a coupon that induces a purchase (that otherwise would go to another school), then measuring the cost of a scholarship without recognizing the direct revenue it generates is clearly going to generate the wrong economic conclusions.

Walk-ons

Moreover, this analysis has not yet taken into account any of the financial benefits of walk-ons to a University. Although some walk-ons choose to attend college independent of the decision to walk on to a specific sport, for many the decision of which college to attend depends, at least in part, on their belief that they will be able to walk-on to a specific sports program. Some see it as a way to earn a scholarship, others as a way to participate in intercollegiate sports despite being not quite good enough to earn a scholarship. Therefore, it is likely that at least some of the walk-ons at any given school would have gone elsewhere if their sport had not been offered.

At UNO, the football team had 112 participants in total; 38 football players got no athletic GIA at all. Some of those students might have come to UNO regardless of whether the school had a football program. For those walk-ons the economic impact to UNO of their playing football is a small cost (providing uniforms, travel costs) that is already included in the schools expenses. But for each student that came to UNO specifically with the goal of walking-on to the football team, and who would have gone to a different school in the absence of football, the revenue UNO receives from these walk-ons is directly attributable to the presence of a football team. Wrestling had 5 walk-ons. Given UNO status as the premier Division II wrestling program, it could be the case that all 5 of the walk-ons would have gone elsewhere had UNO not offered wrestling.

How many of these 43 athletes would have gone elsewhere is impossible to determine without detailed research into their personal decision-making process.[27] But if half the walk-ons would have gone elsewhere, then 21 athletes would not have attended UNO. The loss in revenue is thus 21 times $6,280 in tuition (less $1000 in the cost of instruction, as calculated above), plus $950 in books (which this analysis assumes is half profit), plus approx $2,000 in food (of which half is profit, again by assumption) is lost.[28] Netting out the costs of each components of the GIA, each lost walk-on costs the school $6,755 in incremental profit per student, or a shade over $140,000 for the football and wrestling walk-ons, on top of the $160,000 in total profit from scholarship recipients’ GIAs. Or put another way, accepting one hundred-some scholarship athletes and another forty-some walk-ons did not cost UNO a dime in net scholarship dollars, despite showing hundreds of thousands of dollars of expenses on the books. Instead, it earned the school approximately $300,000 in incremental profit.

Conclusion: NCAA accounting turns a small profit into a million dollar loss

UNO’s accounting tells us that granting GIAs to football players and wrestlers cost $848,401.[29] Those same books tell us that the programs needed a direct institutional subsidy of $1,071,950, ignoring the fact that nearly 85% of that subsidy is sent right back to the University as a related-party payment for scholarship costs that are priced at full retail, rather than at the actual cost to the university. The NCAA (Fulks) accounting methodology advocates that schools sum these two expenses, and would thus conclude that scholarships plus direct subsidies cost the school nearly $2 million dollars. Under this methodology, no adjustment is made for any of the revenues (and thus profits) generated by these scholarships.

Economically, this is simply wrong – there is no politer way to express the fact that deducting the retail price of GIAs that (a) cost the school less than the retail price to provide and (b) are “paid” for by an offsetting direct support line items that has no bearing to the true costs results in an extreme overstatement of costs to the school.

The correct way to think about scholarship costs (as well as any other related-party transaction where the athletic department is nominally making a payment to the school and then receiving a subsidy to cover that payment) is to break through the accounting fiction that is generated by moving money from one pocket to another, and to look at the net effect. UNO gave the athletic department $1,071,950 for football and wrestling, and then it immediately took back $848,401 to give 101 partial scholarships to the athletes on those teams. Economically, this transaction consists of two components: (1) UNO provided a net subsidy to those programs of $223,549,[30] and (2) the UNO gave out discounted scholarships to 101 athletes (who likely would have not attended otherwise) and admitted 40-plus walk-ons (some of whom would have gone elsewhere if their sports had not been offered) that could have had a cost, but in fact results in a net profit to UNO of approximately $300,000 once the impact of GIA-driven revenues and revenues from walk-ons is considered. Economically, the benefits from the second transaction more than outweighed the costs of the first. But a failure to recognize the “funny money” nature of related-party transactions (esp. when adjusted in the wrong direction as the NCAA advocates) results in accounting figures that paint an upside picture of the economic reality of the UNO scholarship program.

Rather than losing over $1 million dollars (or nearly $2 million with the NCAA adjustment), the programs turn a small profit on scholarships, enough to entirely cover their direct institutional support, even before taking into account many of the other accounting methodological choices that often lead to understated revenues or overstated costs (such as failing to attribute licensing revenue to the athletic department).

There may have been smart reasons for UNO to drop its football and wrestling programs, despite those programs’ on-the-field success. The school may feel it improved its brand, solved a Title IX problem, etc. But it should not claim that it saved money by dropping those programs. It only reduced its net revenue at a time when its other costs were on the verge of tremendous increases.

[1] Wrestling with the truth in Nebraska,” by Paula Lavigne,

http://sports.espn.go.com/espn/otl/news/story?id=6488960

[2] Football’s $684,539 plus Wrestling’s $163,862 sums to $848,401.

[3] See, for example, http://www.ncaapublications.com/productdownloads/2010RevExp.pdf

[4] Football’s $863,474 plus Wrestling’s $208,476 sums to $1,071,950.

[5] This note does not discuss another of the Fulks adjustments, the netting out of student fees. But, to the extent that students receive tickets to attend sporting events, the portion of student fees allocated to sports is much closer to being a form of discounted season ticket than institutional support. Another way to think about student fees is to ask whether, when a sport is added, they can be raised, or conversely, when a sport is cancelled, are they lowered. If student fees depend on having a sport, they are sports revenue, not a subsidy.

[6] Football’s direct support figure of $863,474 less its GIA expense figure of $684,539 equals $178,935.

[7] Wrestling’s direct support figure of $208,476 less its GIA expense figure of $163,862 equals $44,614.

[8] If that net amount captures an actual subsidy from the school to the athletic department to cover expenses paid out solely to third-parties, then it is a true expense. But if the athletic department is making other purchases from the university, the true cost is likely lower still, and would depend, not on the (arbitrary) price chosen by the university, but on the actual cost of the good and services provided.

[9] As discussed above, this analysis is focused just on the incremental impact of GIAs and direct support. The literature on college sports accounting describes many other ways that the athletic department may fail to recognize sports-related revenue, such as attributing merchandise sales to the bookstore or a campus-wide licensing arm. To the extent UNO’s accounting also suffers from those problems, the P&L further understates the revenues from sports.

[10] Slightly less, actually – 36 is 48.6% of 74.

[11]Taken from “UNO Cost of Attendance” document, available on PDF.

[12] Note: in this analysis I’ve assumed all of the scholarship football players and wrestlers are in-state residents. To the extent they are from out of state, the school’s profit is higher still, since out-of-state tuition is $15,890 rather than $6,280, and so an out-of-state student on a 33% scholarship would pay $6,407 dollars more into the school’s coffers than an in-state wrestler. Failing to recognize the revenue associated with an out-of-state athlete results in an even more dramatic understatement of profit.

[13] In short: a full paying student and a scholarship student have identical costs associated with attending the school, and they only differ in how much of a discount they receive. Thus the incremental cost to the school of providing the scholarship is simply the size of the discount, which is on the athletic department’s books. However, this is almost certainly not the case at most schools, since it is unlikely the marginal student is paying full price. In the case of UNO, which has an attendance shortfall, there is no displaced student, and so none of this note applies to the case at hand.

[14] This is an important assumption in this analysis, based on personal conversations with Paula Lavigne of ESPN.com. To the extent the UNO is turning away paying students in order to admit athletes, much of what follows would need to be amended.

[15] This too is an assumption but not a very controversial one – unless no other school offers a scholarship, it’s quite likely that players talented enough to get a Division II scholarship would choose to continue playing their sport elsewhere, rather than attend a school that does not offer intercollegiate football or wrestling, esp. if that athlete is now asked to pay full-price for the chance to attend UNO and not participate in his sport.

[16] See http://nebraska.edu/docs/budget/personnel-roster-vol-3-2011-12.pdf, listing every faculty member’s salary. As one example, a full-time assistant instructor in Biology earned $34,756. Several full-time assistant instructors in Chemistry earned between $28,632 and $37,668. Full-time Instructors in English earned more than $35,000 but less than $40,000.

[17] Out-of-state tuition at UNO was $15,890, which was $9,610 more than in-state tuition. For a half-scholarship, that means addition revenue equal to half of $9,610: $4,805. Thus in total the tuition-only profit on an out-of-state football (half) scholarship is $7,030. For a one-third scholarship, that means additional revenue equal to two-thirds of $9,610: $6,407, bringing to the total out-of-state profit on a wrestling (one-third) scholarship to 9,594.

[18] According to http://omavs.com/roster.aspx?path=football, of the 107 players who had numbers, 35 (32.7%) were from home towns outside of Nebraska. It is possible that the portion of scholarship recipients from out of state varies from this ratio, but likely not by much.

[19] According to http://omavs.com/roster.aspx?path=wrestling, 12 of the 32 wrestlers (37.5%) were from hometown’s outside of Nebraska.

[20] It also may be incorrect. UNO’s housing website (http://housing.unomaha.edu/oncampus.php) indicates several housing options including a new building as of Fall 2010 and a new one scheduled for Fall 2011. If those new buildings are being built to meet current demand for housing, then housing may be a scarce resource. On the other hand, if those buildings were built in advance of demand, and have empty space, then providing those rooms to athletes may cost the school almost nothing on the margin for the foreseeable future.

[21] Note that if, instead, UNO gives housing vouchers, then this is also a true cost to the university, equal to the amount of the check. If we continue to assume that housing is a scarce resource, then this doesn’t change the numbers – either they forgo some rent, equal to the level of scholarship aid, or they cut a check for that amount.

[22] Assuming board is 25% of the cost of room and board (consistent with my assumption above that room was 75%), then the retail price of board is $2,035, and the cost is half of that, or $1,017. An athlete on a one-third scholarship will pay $1,357, and thus the profit per athlete is $340.

[23] See for example, http://news.cnet.com/8301-1023_3-57412587-93/why-e-books-cost-so-much/ which describes the typical 50/50 split between publisher and retailer under the “wholesale” model, and explains that “…publishers have been selling print books via the wholesale model…”

[24] To the extent the school has outsourced its bookstore and does not receive a percentage of each book sold, the school may be losing money on the margin by discounting books to athletes.

[25] $279,970 in net revenue on tuition to athletes, breaking even on board and books, and potentially losing up to $220,000 a year on rooms – for a profit of $59,970.

[26] $143,712 in revenue on tuition to athletes, profit of $9,000 on board and $4,000 books, and potentially losing up to $55,000 a year on rooms

[27] Paula Lavigne provides one such example: “The chance to play football was ‘98 percent’ of the reason Max Dennis decided to enroll at the University of Nebraska-Omaha in 2007, even if it meant paying out-of-state tuition with not even a partial athletic scholarship.” http://sports.espn.go.com/espn/otl/news/story?id=6488960

[28] Under the assumption that every dorm room is full and would be filled by another current student if a given student did not attend, then there is no house lost income from a walk-on’s departure. If there are housing vacancies, then the negative financial impact of losing a walk-on in a dorm room is greater still.

[29] i.e., $684,539 for football GIAs and $163,862 for wrestling GIAs.

[30] $223,549 is the sum of $178,935 for football and $44,614 for wrestling. These numbers, in turn, come from $863,474 in direct support for football, less $684,539 paid right back to the school as GIA payments leaving net direct support of $178,935, and similarly for wrestling, $208,476 less $163,862 leaves $44,614 in net direct support.

Sportsgeekonomics in the News

andyhre — Tue, 19 Mar 2013 06:46:00 -0700

Patrick Hruby’s current Sports on Earth piece,The Gold-Plating of College Sports, is a very well-written piece on this phenomenon. Sports economics explained very well. And he cites favorably to our own sportsgeekonomics.com study of the same issue: Monopoly Rents in Action: Gold-plating among Non-Revenue Sports at FBS programs: An Empirical Study.

So what’s not to like? Go read it!

Update: Dan Wetzel has a similar take that is worth reading as well:

O’Bannon case against NCAA sheds light on big-time athletic departments’ fuzzy math

Worth your time

andyhre — Fri, 15 Mar 2013 13:11:30 -0700

http://www.cbsnews.com/8301-400_162-57574401/march-madness-ncaa-fights-full-court-press-on-player-pay/

No time to discuss, but I encourage you to read Brian Montopoli’s piece.

Frank Deford on (whether he knows it or not) creating market...

andyhre — Mon, 04 Mar 2013 10:49:00 -0800

Frank Deford on (whether he knows it or not) creating market power through coordination among competitors and, conversely, the benefits of competition

If the above link doesn’t work, check it out at

http://www.npr.org/2013/02/27/172965051/dear-college-presidents-break-the-ncaas-vise-grip-on-athletes

Jonathan Mahler with another "Who needs the NCAA?" analysis

andyhre — Wed, 27 Feb 2013 18:57:15 -0800

http://www.bloomberg.com/news/2013-02-27/could-the-miami-scandal-bring-down-the-ncaa-.html

Mahler offers a strong conclusion:

Once you start stripping away the senseless rules and regulations, the association’s multimillion-dollar compliance empire quickly crumbles. What’s left? An organization that hangs nets, keeps records and puts on a postseason basketball tournament that anyone would leap at the chance to run — and for a smaller profit margin.

Maybe the best NCAA is a nonexistent NCAA.

News coverage of the NCAA self-investigation

andyhre — Wed, 23 Jan 2013 15:32:00 -0800

I recommend reading Dan Wetzel’s article:

NCAA’s mishandling of Miami case reason for college athletes to get endorsement deals

And then you can head to Andy Staples’s http://sportsillustrated.cnn.com/college-football/news/20130124/mark-emmert-ncaa-amateurism-changes/

And also Gregg Doyel’s piece from last week: http://www.cbssports.com/collegefootball/story/21575106/college-athletes-really-owe-schools-money-then-they-must-be-paid

Well, duh

andyhre — Thu, 17 Jan 2013 05:32:00 -0800

New study out yesterday (which you may have missed because of a certain fake girlfriend story) saying that schools spend more on their athletes than on non-athletes. You can read it here: http://www.nytimes.com/2013/01/17/education/top-public-colleges-in-ncaa-favor-sports-over-academics.html?_r=1&

Well, duh.

According to the New York Times, the methodology for this is to tally up all of the money spent on sports programs (coaching pay, facilities costs, etc.) and on academics (professor pay, etc.) and then divide by the number of students involved:

About one-third of athletic spending at Division I institutions goes to salaries and compensation, the report found, and about a fifth to facilities and equipment. In its tally of athletic costs, the report included recruiting, athletic scholarships, marketing costs, sports camps and spirit groups. Education costs included instruction, student services and a portion of academic and instructional support, and operations and maintenance.

But can you see what’s missing? It’s a small item called Revenue. Unless I am missing it, it looks like no credit was given to sports or to academics for revenue. I suspect if you did that and looked at net expense (i.e., expense less revenue) (and if you left out government grants for sciences programs) you’d see a very different story.

But with that said, it’s no surprise that sports are increasingly expensive, but remember, it’s driven (in part) because sports are increasingly profitable. Moreover, because sports are run by non-profit institutes and because they collectively agree not to pay the primary driver of those revenues, a.k.a. college athletes, they end up dissipating those profits in all sorts of inefficient and wasteful ways.

Fortunately, this is already well known. And your intrepid sportsgeekonomist discusses one aspect of the problem here: http://sportsgeekonomics.tumblr.com/post/37128623071/monopoly-rents-in-action-gold-plating-among

Key points:

But often missing from this discussion is a recognition that the existence of football profits tends to make other men’s sports more expensive to sponsor.[4] This is not a truly causal relationship; the presence of football profits doesn’t literally make men’s lacrosse costlier. Rather, the presence of football profits creates demand for ways to spend that money. Chad McEvoy and Alan Morse have shown this to be a systematic result.[5] Football coaches’ salaries increase.[6] Athletic Directors’ salaries increase.[7] But generally speaking, what doesn’t happen is that when a new dollar of revenue comes in to a football program, the Athletic Department does not increase its contribution to the school’s non-athletic fund by anything close to $1. Indeed, a series of studies commissioned by the NCAA found that for every new dollar of revenue, athletic departments generated 91 cents in new expenses over the period 2004-2007 and approximately $1 in new expenses in the period from 1993 to 2003.[8]

Update: It also just occurred to me that because the analysis looks at per capita expenses, and because those expenses are driven by revenues, that a big piece of what is being shown is a small denominator problem. By this I mean that even if both athletics and academics were both run at a small profit, sports will show higher per capita expenses because it takes fewer students to generate sports revenue. In other words, if sports were a less efficient source of revenues that required more students to generate the same revenues, it would likely show lower per capita expenses (as long as the profits are being dissipated as I discuss in my post on gold-plating).

Great moments in marketing: Beneventum

andyhre — Sat, 12 Jan 2013 10:00:49 -0800

Waaaaay back when, before there was a Roman Empire, Rome was a small city state and it got into a war with a neighboring people called the Samnites. They had a series of brutal wars but ultimately Rome conquered Samnium and absorbed it into its growing territory. One of the cities they conquered was called Maleventum by the Romans (it may have been Maloentum originally… remember in Latin V sounds like W, so oe Malo-entum and malo-wentum are pretty similar).

Anyway, in Samnian (which I think is classified as an Oscan language, a dead form of Indo-European, similar to Latin), Maloentum probably just meant something like Mountain Marketplace. But to Latin speakers, Maleventum could mean Bad Wind or Bad Event, depending on how you split it up. Suffice it to say that when the Romans took over and wanted to encourage people to move there, a name like “Bad Wind” was not going to really do the job.

So, with typical Roman directness, they changed the name to Beneventum, i.e., Good Winds, and voila, we have the modern town of Benevento to this day.

Further Thoughts on Jeopardy! wagering (and comments from one of the actual contestants)

andyhre — Fri, 11 Jan 2013 10:54:00 -0800

Yesterday, I dashed off a post regarding proper Jeopardy! betting tactics based on the unusual circumstance of a tie for first place on last night’s episode. I encourage you to go read it (How to bet, and not to bet, in Jeopardy!), but the conclusion was:

Third Place. Here is where I see the most bad betting and tonight’s show was no exception. As the player in third place, you need to know 2 things. One, you will only win if both of the players ahead of you going into Final Jeopardy! get the question wrong (unless they bet poorly). Two, you’ve already proven over the course of two rounds of Jeopardy! that they are at least a little bit better than you at the game. … the scenario where both of them get it wrong and you get it right is pretty rare. You are best off betting as if the only way you can win is where everyone whiffs. … In this case, the correct bet for the player in third was no more than $2,800 and in reality, should have been zero.

To my delight and surprise, Natalie Hudson, the woman who came in third place on last night’s show, actually came here to Sportsgeekonomics and shared some of her insight. First let me share that with you (it’s in the comments of the previous post, but it bears repeating):

… I will say that I felt time pressure when we were making our wagers.
I first calculated what Parker would end up with if he got it wrong, and I saw that I shouldn’t bet more than $2800.

I didn’t fully think through what Kristin might bet. Like you, I see players in second place bet all kinds of irrational things, so I think I mentally threw up my hands and said “who knows what she’ll bet!” So I didn’t notice the potential tie (and neither did Kristin, incidentally). I did think that I should try to beat her zero bet if I could, so that if I got it and she missed it, I would win. I saw that I would need to bet more than $3400 to do that. Darn.

And this is when the panic set in. Parker and Kristin had both finished wagering , and one of the contestant coordinators was hovering nearby, waiting to take up my scratch paper. They didn’t actually pressure me, and I think at some point they said we could take as long as we needed, but I felt like everyone was waiting on me (and, in a high-pressure situation, I was not thinking especially clearly).

I knew I had to bet either less than $2800 or more than $3400. The smaller bet was the smart one, but I took a look at the category, thought about all the people who would give me crap if I lost by not betting enough, and wrote down $3401. Oh well.

So this was actually the first thing I wanted to write about upon reflection of my post from last night, which is time pressure. It’s one thing to be able to sit on my couch after dinner with the Tivo button on pause, pop open a spreadsheet, and figure out the optimal bets. Because my son was on the show, I’ve seen it being taped and doing math during the commercial break has got to be somewhat harrowing. As Natalie points out, she came armed with good strategy and knew her options. She had to make a call in the moment. That’s got to be hard. That’s why I told my son, who is good at math but was only 12 at the time he was on, that if he was in third and he thought his dollar total was more than the first place guy would end up with if he got the answer wrong, just bet zero (in our example, if you have more than $6,799). We all need simplifying heuristics at times and when one is under the Jeopardy! spotlight is probably a good time to keep it simple. So a bet of $2,799 was probably optimal (especially given the category, see below) but a bet of zero was adequate and easier to be armed with in advance. Economists might call zero the “satisficing” choice (i.e. it was good enough) but I might go further and say it’s the bounded-rationality-optimum because it lets you make a bet without doing too much math in a very stressful situation. (That doesn’t mean I think $3,401 was a correct bid, but I have deep sympathy for Natalie having to go through those gyrations in real-time in Culver City with Alex Trebek standing next to you for the photo ops they do during commercials, etc. it just means she, and all of us who entertain hopes of competing, should go in armed with knowing when to just say zero.)

The second thing I wanted to muse on was more of a Game Theory issue. Upon overnight reflection, I realized that as optimal as I thought the first two contestants bets were, they don’t seem to be a Nash equilibrium. Loosely, what I mean by this is that given what everyone else bet, each player would choose to change his/her bet in response if he/she could. A Nash equilibrium requires the bets to be stable even when the others are revealed (not whether the question is revealed, just the bets). So once the woman in second place bet her $6,201, the first place bet of $9,601 stopped being optimal. So if the first-place player had been allowed to see the other bets and then change his, he could have lowered his bet to $2,801 (which is actually close to the optimal 3rd place bet, so this is weirding me out how the numbers ) and been guaranteed a win whether both contestants got the question right or both got it wrong (though still not if he got it wrong and she got it right).

But then of course, if the second place player knew he was betting $2,801, she could bet more than $6,201 and then she could jump into the lead if they both got it right.

So without doing all of the math, my intuition tells me that the only Nash equilibrium is going to be what economists call a “mixed strategy,” meaning one where the contestants randomly choose among conditionally optimal choices (i.e., if she does this, my best bet is that). But there is economics and there is reality, and while they often coincide, in this case I think the reality is that players play to win when they know the answer, even if that ends up being suboptimal. By this what I mean is that if you are in first place going in to final jeopardy, and you get the answer right, there is no way that a competitive trivia player is going to want to lose when he/she has control of the game. So except for a person with very low confidence in his/her ability at Final Jeopardy!, the person in first place is going to bet to guarantee a win if he/she gets it right. it may not be a Nash equilibrium bet, but it is the only bet you can live with yourself over. How could anyone stand it to make it to Final jeopardy! with the lead, get the final question right, and lose. You just can’t, even if a mixed strategy is ideal and thus argues that you should sometimes mix things up by betting less.

So “optimal” as used in this entire analysis is always used with the recognition that we’re dealing with humans with human emotions and that one possibly optimal scenario, where the player in first place risks losing when he/she knows the answer to improve his/her chance of winning when he/she doesn’t know that answer, is pretty much off the table.

A few other thoughts. First — I just want to say again that it’s easy for me to criticize given I was not on the show. And the reason I was not on the show, despite the fact that my mother and my son have been on the show, is that in the one time I tried out (back in 1989), I screwed up my test and just missed the cut to go on to the more rigorous auditions. So this is a critique from a guy who woulda-coulda-shoulda, but didn’t.

Second, I was fairly generic in my assumptions about category-specific knowledge. I didn’t actually watch last night’s show (I Tivo-ed it and skipped to the end once I heard about the tie, because I was looking for something algebraic to think about) so I didn’t know, for example, that Natalie (a.k.a. “the woman in third place) was an attorney. With a category like legal terms, of course she’s likely to be inclined to take an even-money bet that she would still know the answer even if the two contestants ahead of her in score didn’t. It’d be like if the final Jeopardy! category were “White v. NCAA” (a case I helped to initiate and that I worked on) and I were sitting in third place. I’d probably say “math be damned, bet it all!”

As it turned out, the question was kind of tricky. I work in the law (as a consultant and expert witness) and while (on the comfort of my couch) I almost got to it before the 30 seconds were up, I didn’t get it. This is in part because there is a common, French-derived term that means something like “To see, to say” and it is used for the process of asking jurors about their biases, etc. It’s called “voir dire” and even though I knew that was the wrong answer, it was the only French I could think of. The real answer, “Verdict” is from Old French but retains a lot of its Latin origins and, well, let me let Natalie herself explain:

“Voir dire” popped into my head immediately, and I never doubted it, though of course I should have, since if I’d thought for two more seconds, I would have realized it only had the “speak” part of the clue in it. I think putting “French” in the clue made it kinda neg bait for “voir dire,” but maybe that’s just sour grapes on my part. I don’t know what the writers intended. But if they had said “Latin”

And finally, I felt kind of bad that I made an example out of Natalie, only to interact with her, but she was kind enough to forgive me for singling her out as an example of a phenomenon, even if it turns out that she was actually very clued in to proper betting strategy and just chose a suboptimal fork in the decision tree.

… . No need to apologize for picking on me. You were fair, and you didn’t say anything I haven’t thought a million times since the taping in October.

How to bet, and not to bet, in Jeopardy!

andyhre — Thu, 10 Jan 2013 21:06:00 -0800

On tonight’s Jeopardy! a fairly rare thing happened — the game ended with a tie for first place. When Michael Felder (@InTheBleachers) announced this on twitter, my immediate reaction, without even knowing which of the contestants (in terms of their position prior to Final Jeopardy!) ended up in the tie, was that someone bet incorrectly. This post is designed to explore that outcome.

First, as an introductory matter, Jeopardy! runs in my family. My mother was on the show in the very old days, pre-Alex Trebek, when the dollar values started at $10, and although she lost at the Final Jeopardy! question, the host, Art Fleming, wished her “Good Luck with the Little One.” The little one in question was me, in utero.

Fast forward 44 years and her grandson, my son, was on Jeopardy! during kids week and was the Wednesday show’s champion. We talked about trivia a tiny bit before he was on the show, but really the only thing I coached him on was betting strategy. I told him, as I am telling you all now, that many very smart contestants on Jeopardy! seem to make very poor tactical choices when it comes to betting. And indeed, as I predicted this afternoon when I heard about the tie, tonight’s Jeopardy! is a great example of how poor betting strategy caused the third place player to miss her chance to win.

(As I note below, you can also argue it caused the second place player to have to share the win rather than win it outright. But the specifics of the numbers meant she had to choose a scenario where she tied — there was no clear-cut winning bet, so I cannot call this an error ).

So, let’s work through some Jeopardy! math.

First Place: This one is easy and in fact regular viewers of the show probably know how this goes. Unless you are absolutely convinced you know absolutely nothing about the category and so you’re certain you will get it wrong, the player in first needs to bet just enough to win one dollar more than double what player 2 bets. This is the lowest-risk way to ensure that if you get it right, you’re guaranteed to win and if you get it wrong, you will potentially have enough money to beat the other players nonetheless.

On tonight’s show, the guy who finished Double Jeopardy! in first place had $16,400 and the woman who was in second had $13,000. So, his optimal bet is to bet just enough to get $1 more than double $13,000. That number is $9,601. Not surprisingly, that is what he bet. So one of the contestants bet correctly.

Second Place: It is so rare that I see the person in second place bet correctly that I pretty much assume it will not happen. The thing to recognize is that if first place bets as described above and gets the answer right, there is NOTHING that second place can do to win. Betting every last dime only means that at best you will lost by $1. But since on Jeopardy! losing by $1 still means you lost (there is some minor difference b/w 2nd and 3rd, but in either case, it’s not the big money of winning). Instead, the only way the person in second place ends up winning is if first place gets the Final Question wrong. And you actually can calculate exactly what the person in first place will end up with if he/she gets it wrong, because you know what he/she is going to bet, i.e., just enough to beat you by $1 if you bet everything.

On tonight’s show, as we’re seen, that was $9,601. So the woman in second place should have known that her target was not to beat what the guy in first place had, but what he would end up with if he got the answer wrong, which was $6,799. Since she already had $13,000, she didn’t need to bet anything to beat that, but she could bet some if she wanted to. She just needed to make sure of two things. One, if both she and the guy in first got it wrong, she wants to make sure she loses only a small amount so she ends up ahead of him. Two, she needs to also make sure that if she and the woman in the woman in third place both get it right, that she will still emerge victorious.

As it turns out, the woman in third place had $9,600.

If you are quick at math you will see that this was actually an amazing number in this situation, because it put the woman in second place in a very delicate position. The maximum she could bet and still not fall behind the guy in first was $6,201. To see this, remember that the first place guy is going to bet $9,601 and thus, if he gets it wrong, he’ll end up with $6,799. That means, for the woman in second with $13,000, she can afford to lose $6,201. If they both get it wrong, they would both end up tied. Normally, I would say this means she ought to have bet a little less, say $2 less, but as you’ll see below, in this very rare case, betting exactly $6,201 is the right bet even if it means she would tie, rather than win, in the event that both first and second get it wrong.

This is because she also had to worry about the woman in third with her $9,600. If that woman she got the answer right and if she bet all her money (which she shouldn’t do but more on that later), she would end up with $19,200. Which means that the woman in second place needed to bet $6,201 (yes, the exact same number!) to make sure the woman in third place didn’t pass her if they both got it right. Which is actually pretty amazing. Her maximum possible bet to beat the first-place guy (if they both get it wrong) is identical to the minimum possible bet needed to ensure she beat the third-place player (if they both get it right).

So, suffice it to say, the woman in second place also bet correctly. This is fairly rare to see and I commend her for it. Indeed, in tonight’s show the woman in second was the returning champion, so she’s already shown she is smart and perhaps she’s had more time to think through these scenarios. In any case, she threaded the needle and found herself a way to eke into another day’s competition. Brava!

Note: One can quibble over whether this means she should have bet $6,200 or $6,201. I’d argue the former bet of $6,200 was slightly smarter (and would have given her the outright win tonight), because it meant she would win outright on a really hard question that no one got right and still tie on one that only the first-place player got wrong. Whereas, by choosing $6,201 she guaranteed a win on a question that only the first-place player got wrong and was willing to accept a tie on one where everyone got it wrong. Since the person in third place is usually in third place for a reason — that is he/she is less good at the game — I’d prefer my tie come against third-place, who then advances with me, rather than having first-place advance with me. But that’s a minor quibble and a nuance we needn’t worry about.

Third Place. Here is where I see the most bad betting and tonight’s show was no exception. As the player in third place, you need to know 2 things. One, you will only win if both of the players ahead of you going into Final Jeopardy! get the question wrong (unless they bet poorly). Two, you’ve already proven over the course of two rounds of Jeopardy! that they are at least a little bit better than you at the game. It may not mean that they will be better at Final Jeopardy! than you, but it means that the likelihood of both of them getting the final question wrong while you get it right is pretty low. You might all get it right. You might all get it wrong. But the scenario where both of them get it wrong and you get it right is pretty rare. You are best off betting as if the only way you can win is where everyone whiffs.

So, what do you do then? You know what the first place player will have if he/she gets it wrong. In tonight’s show again that was $6,799. So the woman in third place was in good shape — she just needed to beat this by a little — say $5 — if she lost (I say by a little because she also needs to beware of the person in 2nd playing an optimal bet that allows second place to edge out first if they both get it wrong). A bet of $2,801 means she would triple-tie for first, so betting just a little less, say, $2,795, should secure her a win in the event of everyone getting the final question wrong.

But again, she was in third-place. She is only going to win on a hard question that both of the other two contestants get wrong. Why risk any money on a question that you know is going to stump two other players, both of whom are have played better than her for the last 22 minutes or so? The correct bet here is probably $0. Yes, in the rare event that she got it right and no one else did, if she bets zero, she ends up leaving a little money on the table. But she still wins and gets to play another round the following day. And by betting zero, she gives herself a little more cushion in case someone else under-bets (and thus loses less). In this case, the correct bet for the player in third was no more than $2,800 and in reality, should have been zero.

Instead, tonight’s contestant bet $3,401. I know where she got that — it is what she would need to bet if player 2 bet $0 and she wanted to pass her, because $9,600 + $3,401 would be $1 more than player 2’s initial $13,000. But I cannot think of a scenario where player 2 would bet nothing. Indeed, in this case, it turns out player 2’s optimal bet is darn close to being locked in at $6,200 or $6,201. It’s usually not that easy to know player 2’s bet, but as a general rule it is safe for player 3 to assume that player 2 will bet enough to beat player 3 by at least $1 if they both get it right (i.e., player 3 can think about player 2 the same way player 2 thinks about player 1). So the bet where you just try to nudge out player 2 if she bets $0 is not a good one. You are better off beating where she will end up if she and player 1 both bet optimally. Which in this case is $2,800… except that I still think it’s $0 because if it’s a hard enough question to trip up the first- and second- place players, who would want to make an even-money bet that the third-place player will get it right? Not me.

So, I was right when I predicted that someone bet wrong. What’s surprising is that it was not the woman in second place, who did just about the only thing she could do to survive, and her smart betting tactics paid off with a tie and advancement. But, whether she knows it or not, the woman in third place had the game in her reach, and all she had to do was refuse to bet a dime.

Again, I am not just saying this because I saw how it worked out. Her best bet prior to even seeing the question was $0. (In economics, we use fancy terms like “this is an ex ante, not ex post, optimal strategy, but all we mean is that this is not just a Monday Morning QB sort of carping — it was the smart bet even before the question was revealed). But she bet too much and we ended up with two champions, neither of whom knew the correct answer to Final Jeopardy!, but both of whom bet optimally.

I live in full hope that some day third-place players on Jeopardy! will start betting more wisely. But I am not holding my breath.

"Money for college athletes: not if, but how" : Piece on College football economics by Cohen and Russo

andyhre — Sun, 06 Jan 2013 13:27:05 -0800

http://sports.yahoo.com/news/money-college-athletes-not-204128623—ncaaf.html

I would have like to see some discussion of why this is a collective decision at all (e.g., not discussion of why schools or conferences can’t just decide on their own, or negotiate with a players’ association), but I also realize I am an antitrust nerd.

Rachel Bachman with a new piece on college football economics in WSJ

andyhre — Mon, 10 Dec 2012 10:09:32 -0800

Video: http://live.wsj.com/video/college-footballs-bigmoney-bigrisk-model/AA565F92-0A88-4CB6-ADD9-FE30CE16B1F2.html?KEYWORDS=college+football#!AA565F92-0A88-4CB6-ADD9-FE30CE16B1F2

Print: http://online.wsj.com/article/SB10001424127887324024004578169472607407806.html

Monopoly Rents in Action: Gold-plating among Non-Revenue Sports at FBS programs: An Empirical Study

andyhre — Mon, 03 Dec 2012 12:15:00 -0800

When college sports programs tell you that without a nationwide agreement to cap compensation to college football players at the value of an athletic scholarship, there would be no non-revenue sports (and especially no non-revenue men’s sports), they are telling you a tall tale. I’ve already written about this myth in “Excuses, Not Reasons: 13 Myths about (not) Paying College Athletes,”[1] specifically in “Myth 5: We can’t pay them or else we’ll have to cancel other sports.”[2]

There are several false elements to this claim. Most obviously, many FCS, Division II and Division III schools (with little or no football profits) still sponsor other men’s sports. In fact, in 2011, there were 61 Division I men’s lacrosse teams vs. 223 Division II and Division III teams.[3] Schools sponsor non-revenue sports this because as a campus community, they have decided these sports are worthwhile additions to the campus, like many other money-losing activities such as drama productions, libraries, all-campus parties to celebrate the start of the school year, etc.

But often missing from this discussion is a recognition that the existence of football profits tends to make other men’s sports more expensive to sponsor.[4] This is not a truly causal relationship; the presence of football profits doesn’t literally make men’s lacrosse costlier. Rather, the presence of football profits creates demand for ways to spend that money. Chad McEvoy and Alan Morse have shown this to be a systematic result.[5] Football coaches’ salaries increase.[6] Athletic Directors’ salaries increase.[7] But generally speaking, what doesn’t happen is that when a new dollar of revenue comes in to a football program, the Athletic Department does not increase its contribution to the school’s non-athletic fund by anything close to $1. Indeed, a series of studies commissioned by the NCAA found that for every new dollar of revenue, athletic departments generated 91 cents in new expenses over the period 2004-2007 and approximately $1 in new expenses in the period from 1993 to 2003.[8]

One of the places these football profits are spent is on non-revenue sports, especially men’s sports other than football and basketball. Simply put, in part because the schools don’t pay their players, they have profits just lying around and one of the ways that they spend those profits is to spend more money on their non-revenue sports. Economists call this gold-plating — spending more than is necessary on aspects of the organization simply because money is available to be spent. Athletic programs have no real shareholders, no quarterly profit targets, etc and consequently do not face the same demands as public corporations to generate profits. When the University of Florida’s athletic associations gives the University of Florida $6 million,[9] they are hailed as a great source of profit. Would that acclaim be all that much louder if they turned over $12 million instead? In the absence of incentive pay (such as paying the Athletic Director based on how much money he/she transfers to non-athletics), programs tend to engage in use-it-or-lose it spending.

This short paper seeks to highlight one piece of evidence for this phenomenon of gold-plating non-revenue sports. With assistance from my research assistant Giseob Hyun, I looked at EADA data from 2009-10 and 2010-11, across all of Division I, and calculated the average cost of each non-revenue men’s sports.[10] I calculate two averages for each sport — one for all of the Division I schools whose football teams compete in FBS (Div-1A) and another for the schools with football teams in FCS (Div-1AA). The FBS/FCS distinction is only for football, so for these non-revenue sports, the programs are all in Division I. By splitting up the data this way, we can see how much more money is spent (even after accounting for any revenue) by FBS schools than FCS schools. In the table below, what I present is the difference between the FBS and FCS average — in other words, this is how much more, on average, it costs an FBS school to run a Division I baseball team, track team, etc., than it costs an FCS school to run the same sport in the same Division.

As you can see, in every single one of these sports, the average FBS program spends more (even after accounting for any revenue as an offset) than the average FCS program. In some cases the differences are in the hundreds of thousands of dollars. And moreover, even in the passage of a single year, from the 2009-10 academic year to 2010-11, we generally see the gap growing in tandem with the increase in FBS football revenues.

Because all of these programs are in Division I, the rules on the number of scholarships, coaches, etc., is identical. The primary difference is that the schools in FBS make a lot of money on football and the schools in FCS do not. Now that also means the FBS schools are in more prestigious conferences for these non-revenue sports but there is no economic reason why that, by itself, should make these sports programs more expensive. Instead, I posit that the reason we see so much more money spent on minor men’s sports at FBS schools vs. FCS schools is that FBS schools simply make more money on football and need to spend it on something.

Some may argue that this is because FBS schools want to win more in these non-revenue sports than do FCS schools. That may very well be true. But it doesn’t matter why these FBS schools choose to spend more than they need to run these sports, the point is that they do spend more than they need to. One of the arguments against allowing competitive compensation for football athletes is that without those football profits, these other sports wouldn’t exist. It would be a very different argument for the NCAA and its member schools to argue that without those football profits, the FBS schools and FCS non-revenue programs would be more competitive with each other. Indeed, if the answer is that by agreeing not to pay college football players, the schools in FBS succeed in making lacrosse and wrestling, etc., less competitive, it would seem a very poor justification for that agreement in the first place.

So when you hear someone say that without a nationwide agreement to cap college athlete compensation, schools won’t have enough money to run their other men’s sports, ask yourself whether maybe the solution is to end the collusion, have the expenses of the football team rise to a market level, and then let FBS schools adjust by spending a little less on their other programs, like their FCS cousins, rather than using the fruits of that collusion to subsidize much more expensive non-revenue sports programs.

[1] See Excuses, Not Reasons: 13 Myths about (not) Paying College Athletes, available at http://sportsgeekonomics.tumblr.com/myths.

[2] See “Myth 5: We can’t pay them or else we’ll have to cancel other sports.” available at http://sportsgeekonomics.tumblr.com/post/13848472352/myth-5-we-cant-pay-them-or-else-well-have-to-cancel.

[3] See “Myth 5: We can’t pay them or else we’ll have to cancel other sports,” Note 3, available at http://sportsgeekonomics.tumblr.com/post/13848472352/myth-5-we-cant-pay-them-or-else-well-have-to-cancel.

[4] In this first analysis, I focus on men’s non-revenue sports because in women’s sports, although we see the same phenomenon in women’s sports, it can be argued that Title IX plays a causal role in linking football profits to women’s sports expenses. I don’t actually think Title IX really goes that far in explaining it, since Title IX really only focuses on scholarships rather than total expenditures, but it complicates the analysis enough that I’ll leave that for later work.

[5] Their paper (“Factors Influencing Collegiate Athletic Department Revenues” by Chad D. McEvoy, Syracuse University; Alan L. Morse, Mississippi State University) is not yet published, but they presented their results at the Sports Marketing Association 10th Annual Conference, October 2012. See http://sportmarketingassociation.net.ismmedia.com/ISM3/std-content/repos/Top/Conference/Text%20Blocks/SMA%20X%202012%20Orlando%20Program—no%20cover%20letter%20-%2010-17.pdf

[6] See Charles T. Clotfelter, Big Time Sports in American Universities, Cambridge University Press, 2011, pp. 105-06, 239-40, who shows that between 1985-86 and 2009-2010, the average salaries of football coaches at 44 universities among the top Division IA conferences rose from $273,300 to $2,054,700, expressed in 2009-10 dollars, while the average salaries of college presidents rose from $294,400 to $559,700 and the average salaries of full professors increased from $107,400 to $141,600.

[7] See Jodi Upton and Steve Berkowitz, “Athletics directors seeing major increase in salaries,” USA TODAY (available at http://content.usatoday.com/communities/campusrivalry/post/2011/10/athletics-directors-increase-salaries-school-presidents/1#.ULzqUu-wV8E) which shows that “… at least five ADs make more than $1 million, and since August 2010, at least 10 public schools have given their AD’s pay raises of $75,000 or more.”

[8] These studies tend to phrase the connection as being one in which expenditures generate revenues, but I think the causal connection is that revenues drive expenses. See “The Empirical Effects of Collegiate Athletics: An Update Based on 2004-2007 Data,” with Mark Israel, February 2009, available at http://fs.ncaa.org/Docs/DI_MC_BOD/DI_BOD/2009/April/04,%20_Empirical_Effects.pdf: “For total operating expenditure on athletics, regression analysis … cannot reject the hypothesis that one extra dollar of spending leads to a corresponding one extra dollar of revenue. In particular, the estimated effect of increasing spending by $1.00 is $1.10 in revenue, with the 95 percent confidence interval indicating an effect on revenue between $0.90 and $1.30.” See also “The Empirical Effects of Collegiate Athletic Spending: An Update,” with Peter R. Orszag, April 200, available at http://fs.ncaa.org/Docs/library/research/athletic_spending/2005/empirical_effects_of_collegiate_athletics_update.pdf. “The Empirical Effects of Collegiate Athletic Spending: An Interim Report,” with Robert E. Litan and Peter R. Orszag, the National Collegiate Athletic Association and Sebago Associates, Inc., August 2003, available at http://www.sc.edu/faculty/PDF/baseline.pdf.

[9] See “The University [of Florida] Athletic Association, Inc. Financial Statements, June 30, 2011 and 2010,” page 10, available at http://www.uaa.ufl.edu/uaa/UAA%20FS%206%2030%2011%20-%20Long.pdf.

[10] I define the cost as total expenses, less any revenue the program generates or is allocated — EADA data doesn’t make it easy to discern between real and allocated revenue. I also haven’t reported the very small sports with limited national reach, such as Riflery.

Patrick Hruby's "Amateur Hour"

andyhre — Tue, 20 Nov 2012 10:30:23 -0800

I highly recommend Patrick Hruby’s “Amateur Hour” piece (http://www.sportsonearth.com/article/40374506/) for Sports on Earth and not just because he cites to my “13 Myths” paper. Read it!